Greetings. Welcome to the Union Pacific Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host Mr. Lance Fritz, Chairman, President and CEO for Union Pacific. Thank you. Mr. Fritz, you may now begin.

And thank you, Rob. Good morning, everybody, and welcome to Union Pacific's Third Quarter Earnings Conference Call. With me today in Omaha are Jim Vena, Chief Operating Officer; Kenny Rocker, Executive Vice President of Marketing and Sales; and Jennifer Hamann, Chief Financial Officer. As I'm sure, you all saw on Tuesday, we announced a transition that will take place in our operating department. Jim Vena will be transitioning his responsibilities over to Eric Gehringer at the beginning of the year, while staying on until the end of June as a senior adviser. I'm excited to have Eric lead our operating department into the future. Eric has a track record of success at our company and will push the team to continue to think boldly as we pursue operational excellence. I want to express my deep appreciation to Jim for the leadership he brought to Union Pacific. Jim accomplished everything I could have hoped for and more. He brought a level of expertise and speed of decision-making that has been critical to our transformation. I'm very pleased that he's going to continue working closely with Eric and the rest of the team over the next several months to guide us through a smooth transition. while seeing some key projects to completion. Thank you very much. Jim. Before discussing our third quarter results, I want to acknowledge the work of our dedicated employees. As we continue to operate our railroad through the pandemic, the women and men of Union Pacific are doing an excellent job keeping themselves and their families safe. As a result, they are able to provide our customers with a service product that is fluid and uninterrupted. Our rail network continues to operate at a very high level, reflecting the talent, commitment, and resilience of our Union Pacific team. Moving to third quarter results. This morning, Union Pacific is reporting 2020 third quarter net income of $1.4 billion or $2.01 per share. This compares to $1.6 billion or $2.22 per share in the third quarter of 2019. Our quarterly operating ratio came in at 58.7% an all-time quarterly record and an 80 basis point improvement compared to the third quarter of 2019, despite moving 4% fewer carloads. Our third quarter results represent another step in our company's transformation. We demonstrated our ability to adjust to a sharp rebound in volume, while continuing to provide a safe, efficient and reliable service product to our customers. The results we are delivering both operationally and financially deepen our conviction that the changes we're making to transform our railroad are on track and on target. So with that, I'll turn it over to Jim to provide an operations update.

Thanks, Lance, and good morning, everyone. We had an impressive quarter to turn in the results you see today. We had to watch our asset utilization closely as we dealt with a sharp volume increase following the equally sharp volume decline of the second quarter, as we continue to navigate the pandemic. And we have had some significant weather events in this quarter as well. In the face of those challenges, the team delivered strong productivity gains to the tune of $205 million and a total of $610 million year-to-date, all in all a very strong quarter for the entire operating team. Turning to slide 4, I'd like to update you on our key performance indicators. Driven by the team's relentless focus on asset utilization and reducing car touches, freight car velocity and freight car terminal dwell both improved 3%. These improvements along with increased train length, which we'll talk more about on the next slide demonstrate how our operating model is striking the right balance between service and efficiency. We continue to adjust our transportation plan to run a more efficient network that requires fewer locomotives. In the third quarter, we achieved a quarterly record in locomotive productivity, an 11% improvement versus last year, which is all the more impressive when you consider the mix challenge of trading coal and sand volumes for intermodal volumes. Workforce productivity also a quarterly record improved 13% from third quarter 2019. Productivity improvements were led by the train and engine workforce down 22% versus last year, which significantly outpace the 4% volume decline. Our manifest service remained strong during the quarter driving a 5-point improvement in trip plant compliance for manifest and autos. Intermodal trip plant compliance decreased in the quarter, reflecting the impact seen across the entire intermodal supply chain from the…

Thank you, Jim and good morning. For the third quarter, our volume was down 4%, primarily due to declines in our industrial and bulk business groups. The decrease in volume coupled with a 7% decline in average revenue per car drove freight revenue to be down 11% in the quarter. Weak economic conditions related to the pandemic continue to impact multiple market segments but it was partially offset by stronger demand in the premium group. So, let's take a closer look at how the third quarter performed for each of our business groups. Starting with bulk, revenue for the quarter was down 12% on a 9% decrease in volume and a 3% decrease in average revenue per car. Coal and renewable carloads were down 21% as a result of weaker market conditions from low natural gas prices and soft export demand. Volume for grain and grain products was up 3% from an increased demand of export grain partially offset by pandemic-reduced demand for ethanol. Fertilizer and sulfur carloads were up 4% due to the stronger export potash, slightly offset by lower production of phosphate rock. Finally, food and refrigerated volume was flat and strong beverage shipments were offset by softer food service and restaurant demand. Moving on to industrial, industrial revenue declined 18% from a 16% decrease in volume. Average revenue per car also declined 2% due to a lower fuel surcharge and negative mix. Energy and specialized shipments decreased 20%, primarily driven by reduced petroleum shipments due to low oil prices coupled with weak demand. Forest products volume was flat. Growth in lumber shipment from improved housing starts and repair and remodels offset declines in paper shipments. Industrial chemicals and plastic shipments declined by 9% due to the pandemic-related impacts on both global and domestic demand. Industrial chemicals volume…

Thank you, Kenny and good morning. As you heard from Lance earlier, Union Pacific is reporting third quarter earnings per share of $2.01 and a quarterly operating ratio of 58.7% an all-time quarterly record and our first sub-59 quarter. Looking at our quarterly income statement, operating revenue totaled $4.9 billion down 11% versus last year on a 4% year-over-year volume decline demonstrating our consistent ability to adjust cost with volume, operating expense decreased 12% to $2.9 billion. Taken together we are reporting third quarter operating income of $2 billion, a 9% decrease versus 2019. Other income of $37 million was down $16 million versus last year as a result of lower interest income as well as less rental income. Interest expense increased 11% due to increased debt levels and costs associated with our recent debt exchange. Income tax expense was lower, down 12% as a result of lower pretax quarterly income. Net income of $1.4 billion, declined 12% versus last year, which combined with share repurchases led to a 9% decrease in earnings per share to $2.01. As I just mentioned, our 58.7% operating ratio was 80 basis points better year-over-year. Lower fuel prices had a 100 basis point positive impact on the operating ratio while fuel surcharge lag negatively impacted earnings per share by $0.03. Turning now to slide 14, which provides a breakdown of our freight revenue, totaling $4.6 billion, down 11% versus 2019. The primary contributor to the year-over-year decline was a 4% decrease in carloadings, a substantial improvement from the second quarter, but still in negative territory. Lower diesel fuel prices, down 35% year-over-year impacted revenue by 3.5 points. Positive, core pricing gains were more than offset by our business mix, reducing revenue 3.25 points. Although we continue to yield pricing dollars in excess of inflation,…

Thank you, Jennifer. Our first priority has been and will always be safety. We have a continuous focus on improvement and I'm confident the team has the right plan and is taking the right actions to make Union Pacific a safer railroad going forward. Our service and financial results demonstrate the transformation of our company. We are a more efficient and a more reliable railroad that is driving value for our customers on the way to achieving operational excellence. Our enhanced service product coupled with a lower cost structure and innovative new services is opening up new markets and opportunities with our customers. And as you heard from Kenny today the team is winning by converting more business to rail our customers are reducing their carbon footprint to the tune of an estimated 16 million metric tons of greenhouse gas emissions so far this year as we move together toward a more sustainable future. Our optimism for the future has never been greater as Union Pacific is well positioned for a future of long-term growth and excellent returns. So with that let's open up the line for your questions.

[Operator Instructions] Thank you. And our first question is from the line of Ken Hoexter with Bank of America.

Great, good morning. And Jim great job over the last few years and good luck in the future. Maybe for Lance or Jim I guess just starting off. Keeping your employees down 18% with volumes accelerating a great job in the quarter and great job in the OR but you saw some intermodal struggles as you mentioned. Maybe you could talk a little bit about the incremental margins going forward and your thought on the pace of expense returns as you move into 2021, just given Jen just talked about the kind of inflection into positive volumes for the first time in a while? Thanks.

Jim you want to talk about the expense side and then we'll convert it to the go-forward margins?

Okay. So thanks Ken. I appreciate the question and thanks for saying a good two years not quite two years, but we've got a little bit of work left to do. So I'm looking forward to the next few months to really get this place going even better. So, on the intermodal and the expense side, I think we showed in the quarter how we can handle the business and be smart about how we handle the business. It is -- if we need to win we need to be able to look at things on a full supply chain view and that's what we did. And everybody knew that you cannot easily react without really disrupting the entire network when it comes to the intermodal volume that increased substantially. But I think the speed that we reacted and where our metrics are after was a great move. The expense will continue on a unit basis to be less purely because of the capital investments we've made in the network and the efficiency. We turn our locomotives way quicker, we turn our crews quicker, we turn our cars quicker, we handle the inspections quicker. We do so many things faster that we'll continue to build on that. So I don't see -- whatever business comes on I think we still will be able to improve our efficiency across the board.

Yes and building up that Ken from an incremental margin or go forward margin perspective, of course we continue to expect that we're going to improve our margins. The capital investments that Jim just outlined are going to be a support. And we're also looking with Kenny's team at an end-to-end view of our intermodal product, whether it's international intermodal or domestic intermodal. And those both give us an opportunity to margin up whether it's by efficiency in the chain or an opportunity for better pricing.

Thanks Lance, thanks Jim.

Thanks Ken.

Our next question is from the line of Justin Long with Stephens. Please proceed with your question.

Good morning. Jim I'll echo the congrats and wanted to ask about the announced transition. I think a lot of investors are wondering if this means the heavy lifting on PSR and productivity gains is complete. So could you just address that? Do you disagree with that view? And if so, can you talk about why now is the right time to make this transition versus sticking around for another year or 2?

Okay. Well listen I appreciate the question. So let me take it back to when I came on at Union Pacific. Lance and I sat down and we talked about what we needed to do and how I could help the team and -- at UP to drive the productivity that they already had in mind. It wasn't -- I think everybody in Union Pacific realized that listen there's an opportunity to become more efficient and be able to have a great service product and win in the marketplace. So those goals were there. And I was really -- it was refreshing to hear Lance and Rob we were all in the same room together talk about how we wanted to become the leader in the industry when it came to efficiency, operational efficiency and service excellence. So you build on that. I committed when I came on the 18 to 24 months. I could have stayed longer. I could have stayed shorter. There was nothing that was tying me into the company. But my job was to build the foundation of operational group that understood what was possible and what we could deliver. And I think that's what I've done. And I'm very comfortable that Eric is the right person to lead it. Let's just put this right down to is he Jim Vena? No he's not Jim Vena. And I'm not -- if you compare me to some of the other people that have led companies operationally, I'm not the same person. I think we've done a great job of not causing a lot of pain to our customers. In other situations people have done that. So we've been measured. Eric is the right guy. He's got the right background. He's got the right skill level. I like…

That's very helpful. Very helpful insights. I appreciate the time.

Thanks, Justin.

The next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Hey. Good morning. Thanks for taking the question. Jim, congratulations on the last, I guess, sub two years. Maybe one more for you before you head out into the new role and keeping an eye on things from afar. Look at all the buckets of productivity and the success you've had including this quarter, it is slowing down a little bit, but one area where we haven't seen as much improvement is really on fuel economy. You've got record train lengths that are going up. You've got locomotive productivity that's at all-time high newer fleets. So I know mix is an issue grade and topography is an issue, but some of your peers have been able to move the needle a bit more on that front and we haven't quite seen that yet from UP, in fact, going up a little bit in terms of consumption this quarter. So maybe you can help conceptualize or even quantify what that opportunity looks like? And if that's one of the big buckets you see left for the team as you step more into an advisory role? Thank you.

So let me answer it backwards. Yes, it's a bucket that we see and it is a substantial bucket on an expense side that we think that we've got the right plan in. The number you see if you peel back the mix issue, this last quarter we had over 4% improvement in our fuel use on a GTM basis if you look underneath. Now that's masked with the change in the type of trains that we're running and the volume, but I'm very comfortable that we have the right process in place that we continue to drop. I don't think we're going to get 4% every quarter. But the best way to look at it is -- is if we put more on the same number of trains, with the same number of locomotives that we had before and that's what we're doing on an average number of horsepower per train and we're able to build the trains to what our capacity is we will continue to see that fuel productivity number improve. Are we going to be the best in the industry? No. There's some advantages for railroad I used to work at. Their mainline grade is pretty -- is weighed at about half of ours. So we're going to burn a little more fuel to get over some of those mountains getting out to the West Coast. But at the end of the day, we have a lot of advantages on how we can turn and use the fuel and we've spent money on technology, continue to -- so that the locomotives and the -- locomotive engineers are better at understanding how they operate and I see us continuing to get that. The mix turns -- Eric is probably going to get maybe a mix turn down the road and everybody will say he's brilliant on saving the fuel. So -- so I'm very comfortable.

I have actually -- have that one. All right. Thanks, Jim.

You’re welcome.

Our next question is from the line of Allison Landry with Credit Suisse. Please proceed with your question.

Thanks. Good morning. So just thinking about the fact that volumes are recovering in addition to the higher productivity gains that you're now looking for this year. Just as you think forward, would you expect to see a step function improvement in the OR in 2021 as volumes allow you to more fully realize the benefits of PSR? So maybe just some thoughts on that. I can appreciate you're not giving next year's guidance, but also if you could quickly address at what point do you think you can achieve the 55% OR? Thank you.

Yes, I'll start and ask Jennifer to back me up Allison. This is Lance. Good morning. So the moving parts as we look into next year, we do expect volumes to be better. Of course, it won't be hard to do that against the pandemic. And it's hard for us to gauge exactly how much better. But that will be a help. Productivity is going to continue. That will be a help. We haven't nailed down that target, but it's going to be healthy. And we've got plenty of initiatives moving into next year that we'll keep a shoulder into. Mix is a real big question mark. I don't see much reason to change our current mix experience until the industrial economy really starts recovering a little bit quicker and with more strength than we've seen so far post our trough in May. So that's the biggest question mark, I think, that will dictate just how much margin improvement we are able to attain next year. Jennifer?

Yes, Allison thanks for the question. You've heard us say many times the drivers of our performance are what Lance just laid out its volume, productivity and then the price piece. So we're encouraged by what you're seeing in the truck markets today and with the service product that we've got out there and all the work that Kenny and his team are doing. But we're still working through our plans for 2021, but we have every expectation that we've got a great road map ahead of us where we can continue to improve. We'll give you obviously more detail around that when we talk to you in January. And our hope is sometime next year we should be able to gather everyone as we were hoping to do in the fall of this year and with a little more certainty on what's going on with the economy and the pandemic be able to lay out for you guys kind of a multiyear plan that we see for ourselves and how we look to continue to make improvement and go to the 55% OR.

Okay. That’s helpful. Thank you.

Yes.

Thanks.

The next question is from the line of Jason Seidl with Cowen & Company. Please proceed with your question.

Thank you, operator. Good morning, Lance and Jim. Jim, congratulations on the retirement 2.0 there. I'm still looking -- wondering when it was going to come.

Thank you.

I want to concentrate everyone a little bit on mix on intermodal because clearly the surge to the West Coast has been somewhat aided by restocking efforts that are likely to continue at least in the near future, but at some point that will abate. So how should we think about the mix between international business and more domestic business for 2021 and the impacts on the arc?

Kenny?

Yes. So thanks for that question, Jason. First of all, I would just say that controlling what we can't control we're going to go out there and win as much business as we can in all those markets. And this year we've been able to do that. We've been able to grow our e-commerce business. We've got a great service product that Jim and the team has provided us. On the international side, we talked about an international win. And even on our domestic truckload side, we've been able to go out there and win new business. We have seen a little bit more of our international business transloaded into some of the West Coast ports. That just means that we have to compete on the domestic side, which I've said, we've been able to do. So regardless of how that product comes in, we've inserted a lot of technology with our customers to go out and win business, whether it's APIs that see the business coming from Asia, whether it's our ITR business to give great visibility to our customers on when their business will move. We feel like we've got a really strong domestic product to go out there and compete. And we've also won quite a bit on the international side.

Right. But Kenny, if it does slow down, should we expect a change in the arc for 2021 on the restocking side?

What specifically slows down Jason?

So the restocking efforts that we've seen in all the massive surge that West Coast supports lately.

Yes. So, Jason, this is Lance. I get what you're asking. So part of what we're seeing in domestic strength is a restocking, because we can see that in the data as well, right? Inventory is relatively down. Sales are up and the inventory sales ratio is below where I think retailers traditionally would like it to be. So as we look into next year, some amount of that destocking probably drops off a bit. It's hard to say just exactly what happens in impact on mix and overall arc as that's occurring. One thing that is likely to occur as we go into next year would be, the surcharges dropping off in the L.A. Basin and up in the PNW, but those are really asterisks right now in terms of the overall yield that we're reporting. They're helpful, but very marginal.

Yes. The only thing I'll add to that is, if you look at the data, the retail sales have actually improved sequentially. So there is a pull element to the demand. And the inventory that they sit today, they're lower than they were in 2019. So they're still lower inventory. And then you think about that e-commerce business, I believe that there is a structural change out there with the consumer preference that there's going to be more e-commerce there that fits very nicely with our service product.

And that parcel business is very attractive to us.

Yes. I mean, we're just starting to get into the bid season for next year, Jason. And I think maybe that's part of your question too, in terms of if that truck market stays tight, we think that's a great opportunity for us, particularly with the service product that we've got to offer right now.

Okay. Well, looks fantastic. I appreciate the time, as always, everyone.

Yes. Thank you, Jason.

Thank you.

The next question is from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Hey. Good morning, everyone, and thank you for taking my question. Lance, I guess, in response to a previous question about intermodal, you said we're going to look to margin up in the future. But it's interesting here, because if I look north of the border since you guys peaked on volumes, go back more than a decade, we've seen greater than like 80% expansion in intermodal volume on the Canadian networks, or at least one of your competitors. It's been roughly flat for you guys over that same time period. And I know you've gone through a lot of mix shift in the network, but what can you tell your investors? Is the strategy here to continue to focus on margin above growth? I keep hearing you guys talk about a service product that's competitive, is now the time to focus a lot more on top line? And what strategies can you take? Can you be more proactive at the ports, because we've definitely seen a shift from U.S. West Coast up North to Canada?

Yes, Brandon. Thank you and that's a great series of questions. So the fundamental difference today versus 10 years ago is our service product is much, much better. It's much more reliable. We're actually doing what we say we're going to do. And we can see that very clearly in our KPIs when we break out the premium, the intermodal and automotive car trip plan compliance. And over 10 years that metric has actually gotten harder to achieve. So we're measuring ourselves through a harder metric and it's much higher in terms of absolute performance. Customers experience that. So the item number one is, we're positioned to be able to win business. Item number two is, we are not monolithic in terms of our focus. We want to grow. We know that growth volume is going to be a really important lever, as we continue to improve our operating ratio going forward and so is price and so is efficiency. And we think we can achieve all at the same time. And item number three, Brandon, a little bit of a proof statement that has been completely masked by the pandemic and its impact on the economy is in the last bid cycle, in the last bid season we were successful at winning business. We increased our penetration through the BCO cycle on their bid season and Kenny mentioned one, we increased our exposure in the parcel world and we've done it across a number of other retailers. So as we look forward, Brandon, you've got it exactly right. We are positioned to be able to grow and we're holding ourselves accountable for greater growth than we've experienced in the last 10 years. We should be able to achieve that.

Yes. The only thing I'll add to that also is that the team has done a great job of inserting product into our supply chain. So whether it's matchbacks in Dallas, whether it's reloads out of the Midwest, we're doing everything we can to make it sticky for our customers. We've worked with the port to get some really strong standards to get out of the port, working with Jim's team. I talked about the technology on the API side where we're working with our largest international carriers, so that we can have visibility to when they come in and instill confidence and trust in our service. So we're taking a active, very proactive approach to winning in those markets.

Thank you.

Yeah. Thank you.

The next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

Hey. Thanks. Good morning guys. So Jennifer, comp per employee was up 8%. I think you mentioned some severance. Can you quantify that and just give us some color on how to think about comp per employee going forward, just because it was a bunch higher than we thought? And then, can I just get one clarification? Lance you made a comment about intermodal and end-to-end. I'm not sure what that means and maybe what that should mean for the IMC relationship? Thank you.

Sure. I'll take that after Jennifer.

Sure. On the comp per employee side, Scott, you're right. I mentioned, we have wage inflation. That certainly was part of it. We did have severance. I'm not going to quantify that, but that is something that we don't expect to see in the fourth quarter. Jim mentioned some further headcount reductions that were made on the operating side of the world, so there was some severance involved with that. We also did have some higher cost per crew in the quarter. When you think about some of our weather challenges and the fact that we are staying quite lean from a headcount perspective and so we're working the crews a little bit harder, so a little bit higher overtime cost there. Going into the fourth quarter, we're going to still stay pretty lean as you still -- there's a little uncertainty around the economy. You've got the holiday season coming up, so I would expect that we're going to keep that crew base pretty lean. So you may see some elevated cost per crew. You're going to continue to have the wage inflation in 4Q, but you will not have the severance on a sequential basis. Lance?

Yeah. And Scott, your question on what did I mean by end-to-end in the domestic intermodal world? That's not an announcement of us going retail. So let me be crystal clear about that. But it is an indication that -- and a recognition that the service product that wins in the marketplace looks transparent to a customer from end-to-end and needs to be simplified and much easier to deal with. And we are working with our IMCs and our significant IMC partners to make that happen. And that needs to look like one point of contact consistency across the entire supply chain. And there's just a whole lot of work that's going into that that I wanted to make sure wasn't lost in this call.

Thank you.

Yeah.

The next question is from the line of Chris Wetherbee with Citigroup.

Hey. Hey, thanks and good morning. And congrats Jim, great job on the two years at the firm. I guess, I wanted to ask a question about sort of capital returns to shareholders. I know there's going to be some focus on debt pay down in the fourth quarter. Kind of curious, Jennifer, how you think about that impacting potential buybacks maybe in the near term, then sort of bigger picture do you think that there's an opportunity to kind of push a little harder on the buybacks as you go into next year and sort of cash flow comes up with earnings power? Just some thoughts around that would be helpful.

Sure, Chris. Thanks. In terms of fourth quarter, we came in - or end of the quarter, I should say, cash balance of $2.6 billion. That's -- we've typically ran closer to $1 billion, $1.5 billion in terms of cash balances. We've obviously been more conservative with that over the last couple of quarters with the pandemic and uncertainty. Things feel like they're evening down a little bit although you see the same news I do where cases are surging in different parts of the country. And so, we're going to be careful with that. But we think fourth quarter is a good time for us to start redeploying some of that cash. With interest rates being as low as they are, it's doing very little for us sitting in the bank right now. So we want to put some of that back to work. We're doing that through shares as well as paying off some debt. It has a little bit higher coupon a little higher cost for us. So we think that's the right economic thing to do. And as we look into 2021, again, in January, we'll talk more fulsomely about what our plans are not just for how we see the year playing out but how we're going to deploy cash. But we think certainly our job is twofold. It's to generate the cash through business and efficiency, and then deploy it back to our shareholders. I think we've got a good track record of doing that and rewarding our shareholders and we plan to continue that.

Okay, got it. Thank you.

Thanks.

The next question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.

Thanks, operator. Good morning, everybody. Jim, congrats on another successful tenure, I think you have the respect of everybody on this conference call. Just a quick question. Is there anything limiting you from joining another railroad relatively quickly? And would you be open to that when you do leave UNP, if you can address that? And then, Lance and Jennifer, we've been talking about the potential for incremental margins for a long time now in terms of how good they could be when the revenue growth turns positive. I just don't think we saw it to the extent that we would have in the third quarter, especially when you look at the sequential movements in non-fuel expenses. It was obviously a very challenging quarter from a congestion perspective, which may have something to do with this. So I was hoping you could just answer one, did the quarter kind of meet your expectations around flow-through from the sequential revenue growth? And then two, any cost that are worth maybe calling out that are specific to the congestion that we all know about that occurred on the West Coast? Thank you.

You want to start?

I think I want you to start.

Amit, you're pretty good. Thank you very much, and you slipped about five questions in there. That was pretty good. I love it. So, you've got it written down, Jennifer?

I think so.

So, listen, I'm 62 years old. I feel great. I'm not looking further than what I've had the responsibility right now going forward. But all I'll tell you is, listen, we're going to elect a President that's either 74 or 78. So, I'm still a young guy, and I'll leave it at that.

And in terms of the margins, Amit, we did still have volumes down 4% in the quarter. And as I look at it, going from 2Q to 3Q, I would say that our margins improved sequentially, incrementally in the 60% kind of range. So I think that shows you there's power in the model. And as we look and see volumes go positive. I think that's the thing to focus on. And the fact with that we think we'll be able to have very strong incrementals. Were there some cost headwinds in the quarter? There always are. We called out the ones that we thought were most important. There were some severance costs. You've got a little associated with some of the mix impact. As Lance has said, that mix impact probably isn't going to change too much, but we're doing everything we can to improve the fluidity of the network and prove how efficiently we handle that business and that's our real opportunity. So, I'd say less in terms of big challenges more in terms of we see continued opportunity.

Yeah. Amit, this is Lance. So, we're not disappointed at all with our incremental margins in the quarter, and we also think there's continued opportunity to be even better than that.

Thank you, guys. Appreciate it.

Yeah.

Next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thanks. Good morning, everyone. I have a three-part question but on one topic. So I guess that counts as one question. Just I know we've discussed intermodal a fair bet, but just a couple more follow-ups there. First, can you just give us some color on how your customers are kind of taking what's happening right now? I mean clearly a lot of it was unprecedented, but at the same time are they upset about the surcharges and the service issues, or are they understanding? Second, if you do get higher volumes once this normalizes but offset by adding more resources and fewer surcharges, what does that mean for the profitability of the intermodal business heading into next year? And third, I'm not sure if you actually said this now, but what is the time line for resolution for the network issues?

What was that last part, Ravi, you dropped off a little bit?

What is the time line for resolution for the network issues on the intermodal side? I'm not sure if you actually quantified that.

Yeah. I'll start that off. Jim, you jump in if you got any questions in. When we walked into the third quarter, the entire supply chain was constrained. It's not a rail issue. You got the terminals. You got the port. You got the dray careers. Everyone was constrained. What we did immediately was got together as a team would operate in and then concurrently engaged our customers. And we did a number of things. You brought up a few. We adjusted our rates -- the transactional rates and our surcharges to make sure that we could protect those customers that are with us year round. We also inserted some new processes in place. So we gave our customers new guidelines for when they could bring their containers in. We sat down and talk with our customers about container dwelling and chassis dwelling. I talked about this a little bit earlier. We inserted as much technology as we could, adjusting and getting a higher percentage of our customers to our ITR functions so that they could have greater visibility to when the containers would move. We work with our dray carriers and started technology there. So they have really crystal clear times on when they can drop off or pick up a container. So as we stand today real-time, we feel really good about where we are. Yes it was bumpy earlier in the quarter. I think our customers really appreciate how we have worked with them up to this point. What I would also tell you is that as we are working with them to insert more efficiency and rigor around those processes, it's opened up more opportunities for us. I feel very bullish about the fact that with what Jim is doing with the train service, what our terminals are doing we're handling as much as possible but we can still through efficiency and adding in a little bit more equipment get more volume out of it. So we're feeling pretty bullish about it.

Ravi, if I could and maybe I misunderstood the piece about how fluid the railroad is. The railroad is as fluid as it ever has been. We do not have a capacity issue. And in fact we are spending money to actually make it more efficient. Consolidation in Chicago that I talked about in prepared before was clear to say we want to consolidate to two big terminals and one smaller one in Chicago from six, so that we can turn the cars faster give the customer a better service be able to turn it. We see what the opportunity is and we also see what's happened north of the border and we think that to compete and to win without being a price discussion is to have a low cost. We operate our trains very efficiently. We operate them fast. We turn the cars quick. No one in North America moves in speed across their network with the premium business as fast as we do right now. So we can give the best service product to people whether you're going from L.A. over to Texas and we're going to be as fast as anybody into the Chicago market. So that's what it's all about. We think that if we have the right service, we got the capacity we know we have we spent on making the signings longer so that we can run more efficient trains. When our train miles are down, which means that -- in the 20% range that means that we've opened up that much capacity on top of the capacity we had before. So I'll tell you we have got this thing coming together properly. More efficient terminals, more efficient than visibility with our customers at the ports and working with the ports so that we have an efficient product there, move the containers out quicker, the domestic product to make speed and consistency that the customer wants. I'll tell you I'm very comfortable at where we're headed and we'll just continue to improve it.

And Ravi, let me touch base on your margin question, right? Because you had a question about what's going to happen to margins on intermodal product as you look forward? In the long run and in the intermediate run, what Jim just outlined is a big driver of the margin on that product line, which is the efficiency of the service product and its service reliability. That sets us up for pricing through Kenny. And our expectation with all of our product lines is that over time, we're going to continue to have an opportunity to improve its margin. So I don't look forward and get a concern as volume grows that costs are going to overrun some other aspect of that product. We're in great shape.

Yeah. And you mentioned the surcharges too. And I think it's important to point out those surcharges are really a net in the overall scheme of things. And so as we go through peak season we remove surcharges. That's not going to have an impact on our margins.

Great. Thanks for the great detail. And Jim thanks for everything and good luck for the next phase.

Thank you very much Ravi.

Our next question comes from the line of Jon Chappell with Evercore. Please proceed with your question.

Thank you. Good morning, everyone. Q&A fatigue makes it difficult to count to one, but I'm going to try my best here. Kenny we've talked a lot about mix and yield and I think conceptually it makes sense when you think about the growth of intermodal and some of the headwinds in the bulk categories. But you guys break out very clearly the sequential pace within commodity. And when we look at like grain and food and refrigerated and coals and fertilizers, the sequential step down has been even bigger than in some of the lower mix businesses. So what's kind of behind that? And what does it take to reverse that negative trend in the higher yield bulk segments?

We're right there now. We -- I'll segment some of the commodities that you're talking about. We feel really good about grain and walking into this quarter the demand that's out there and the demand that should move in this quarter and I'll call it the near-term we should see more of that. If you look at the other industrial commodities I made the comment that they are improving sequentially. Now we can help with that we can go out and add business development wins on top of that. And that's what the team is focused on. Our marketing team has just done a great job of going out there with data analysis and looking at where we should be hunting, where we should look at prospect and where the leads are, where to reconnect with customers or smaller receivers that we've lost and the sales team has got a really good proactive look on how much business we're doing with them. So the markets are coming back slowly sequentially, which will help and we're going to accelerate that by going out there and win the business.

Okay, great. And thank you Kenny.

The next question is from the line of Walter Spracklin with RBC Capital. Please proceed with your question.

Yeah, thanks very much. Good morning everyone. And Jim you answered all my questions about your departure just to say congrats and good luck to you as well.

Thank you.

Yeah. So moving on to Kenny I guess. You mentioned about stickiness of the customer and looking to get some fluidity out of the port. One of your peers in Canada has started to look proactively around using their land as a way to enhance or entice that stickiness about leasing land to a customer adjacent to facilities as one of those approaches. Do you have opportunity sets like that where when you look at your land portfolio that you could use that as a sales weapon to gain share in a more sticky way and in a way that gets some of that traffic and congestion out of the port and over to a transload facility more inland something along those lines?

Yeah. Thanks for that question. The short answer is yes. And that's not something new for us. I don't want you to think that we haven't done that. We've been assessing our land, looking at our land. I won't go into details of where we are and how we think about it longer term, but I can tell you that we would expect to take advantage of the resources near the port.

A great case in point, Kenny. And we've talked about this for years now, is Dallas to Dock and development that's happening around the Dallas intermodal terminal which Walter is literally thousands of acres. In your mind think a couple of thousand acres that we are developing and have developed in concert with a property developer that is rail-centric in its perspective. There's opportunities like that that we either have in the hopper have already executed or are beginning development plans for.

Any time frame of when that could be converted to a deal?

Well sure. No specifics, but I would expect virtually every year we will have some aspect of that kind of business development occurring.

I mean there's business there now and there's opportunities to go forward. And certainly, you've heard us talk Walter as we have been consolidating facilities. I mean we're generating more opportunities along those lines when you think about our footprint and the land profile that we have to work with customers to further grow.

Right.

Excellent. Thanks for the color.

Thanks, Walter.

The next question is from the line of Tom Wadewitz with UBS. Please state your question.

Yes. Good morning. I know you talked about this a little bit, so I hope this isn't too redundant, but I think it is something that investors and I think people were surprised on the change. So Jim, I was wondering if you could maybe offer any personal perspective on the change. I mean I think about it you don't sound like you're overly tired or unenthused about railroading. So it does -- it just seems surprising that you're leaving. So I don't know if there's any personal color you can add to that? And whether there's a Board component? I mean do you talk to the Board about this and kind of say "Hey why should I stay, or what's the path?" So just wanted a little more perspective on that. And sticking with the two-part theme for Kenny, can you offer any thoughts on UP's franchise sensitivity to the homebuilding area? Just kind of how much of traffic is sensitive to that. So just a small add-on to that? Thank you.

So listen I appreciate the question. The Board has been very supportive, clear understanding of what I came in? What the time line was? What I wanted to do? How I wanted to set it up and at what point I wanted to move on? I want to read there is absolutely nothing. The relationship is great with Lance. Relationship is great with the entire team. It's just -- it's a great time for me to move on and have a long-term person set-up. And Eric is a long-term person. You see his age that he can drive this thing. And I'm very comfortable. This is a strong team like the people that are sitting here with me around the table, I'm very impressed with what Kenny has been able to perform. He's going to bring the business into this company. I just don't see -- we leverage the great facilities we have. It was a great question on -- that Walter asked us about what capability we have. So this is a great time. I think we've got a great network. We've got -- if not the best network pretty close to the best network in the entire industry. We leverage with a real efficient railroad. We grow the business. I just see this place keeping on moving ahead. And I've done what I needed to do. And Lance and I have worked out a real clear sort of help in the transition which I'll do with Eric and the entire team and I'm very comfortable that we've got the right team. And listen Jennifer is top-notch and the relationship Lance and I have had has been spectacular. An outsider coming into a company that's -- the storied history that UP has and they welcomed me, we worked together. I can't be more comfortable with everybody that I've worked with in this company. So Kenny?

Yes. So thanks for that question. I'll tell you we're encouraged by the recent numbers for housing starts here that came out earlier this week. What's more encouraging for us is the mix. So there's a stronger mix of single-family housing starts and the multi-family housing stars which works out well for us. As a franchise, hey we enjoy some pretty long-haul shipments to Chicago down into Texas. And we feel good about our strategy and ability to compete along the I-5. I think what people fail to realize or sometimes miss is when we think about housing starts, we're just not thinking about the lumber. There's just so many other commodities that are behind it. You got cement, you've got PVC piping, you've got the rock, you've got plastic for the carpet. So housing starts just really fuel a lot of things. They got...

They've got like furniture, appliances, roofing...

Look I could go on. It really fuels a lot of things. So that's a very encouraging macroeconomic change for us.

Is there a way to ballpark it though? Is it like 10% of the book that's sensitive or 20%? What's the ballpark?

Yes. I think it's fair for us not to go in and try to arrange that out for you and just leave that the fact that, we like the fact that it's improving and we take advantage of moving not just that lumber of moving into the house, but everything associated with it.

Okay. Thank you.

The next question is from the line of Jordan Alliger with Goldman Sachs. Please proceed with your question.

Hi. I just wanted to come back quickly to the grain question. I know you said you're encouraged, but specifically on the export side our understanding is commitments for both soybean and corn are well above five-year averages to China. Just Kenny maybe you could give some sense or scope of the export grain franchise for UP? And what sort of tailwind that could really be? Thanks.

Yes. So I've got myself in trouble trying to size this grain market before. So what I will confirm for you is that you're right in line, it's going to be right in there with the highs over the last five years. It's going to be a really strong market. And so I can confirm that for you. I won't size it for you, but it's going to be a really strong market for us.

And Kenny, we'll participate there both out the PNW, we'll participate there out the Gulf?

We've seen significant growth in those three areas and I'm adding Mexico to it. And so the PNW, the Gulf and Mexico, we have seen significant emphasis on that significant growth and we've got high expectations for the quarter.

Great. Thank you.

The next question is from the line of David Ross with Stifel. Please proceed with your question.

Thank you. And Jim, now that you mentioned, can you just run for [indiscernible].

I'm an American citizen, but I wasn’t born in the U.S., so I cannot do it. Otherwise I would like to do sometime, let me tell you.

I would love to get you on Ballard, is a better third option. Going back to the improved efficiency of the network and the excess capacity that's generating for the UP, specifically in terms of railcar locomotive needs, how much do you think you can really grow volume-wise before you need new railcars new locomotives? And how much of that capacity have you actually taken out removed, retired versus just keeping in storage for future growth?

Well let me start and then maybe Jennifer you want to talk about how we're handling it. But sure we've got lots of locomotives. I didn't even mention it this time. I think we've got 3,000 of them parked. So we won't be needing locomotives. If we could sell some of them and I'll leave that to Jennifer, but if we could do something and monetize them, I think we would but a pretty tough market. On the railcar side, it's depending on the mix of the traffic. We have cars, available cars parked, we've returned as many as we can to make us more efficient that way. So it's a mix on what we would have to add depending on the business. That's the way I look at it. If we were done operationally then you could say "Boy if the business went up on one segment on the grain side, we'd have to go on and lease more cars to bring it in." We will not. We still have efficiency left to be able to – if the business goes up x, we're going to be half of that on the cars that we have to put in to be able to handle that business. And that's what I'm real comfortable with.

Yes. And on the freight car and locomotive side David, freight cars, we tend to own – this isn't entirely true but we tend to own the multi-use kind of cars. And so as you see changes in markets like we've seen the surge in grain, we've been able to repurpose some cars that had been hauling, I think fertilizer and move into grain service and obviously box cars is – can move anything. So our freight car fleet, we feel good about where that's at and our ability to deploy it as we need to. On the locomotive side, we look at the fleet by type, we have a relatively young fleet kind of overall and we have opportunities to modernize that fleet and redeploy it as the volumes come back up. And we see that as an opportunity for us going forward. We're obviously going to use that fleet as efficiently as possible, but we've got plans for every locomotive we own. And whether it's today or maybe tomorrow, that's the opportunity for us. And that's – you've heard us talk a lot about growth and the growth of margins. The capital efficiency of our ability to grow going forward is tremendous. When you think about the fact that we have the freight car assets, the locomotives and the track assets to put more business across and leverage that investment that we've already made is a tremendous opportunity for us. So we look forward to taking advantage of it.

Thank you.

The next question comes from the line of Cherilyn Radbourne with TD Securities.

Good morning. Thanks for squeezing me in and Jim our best to you. I wanted to ask with the industry now operating based on kind of a similar philosophy, do you think there's an opportunity to work together a bit more creatively to develop new interchange traffic?

100% Cherilyn. And we're actively working that with every other Class I railroad partner, of course excluding BNSF, there's really not much opportunity to do that with them. But whether you think about it in the context of – historically, there's this watershed area. And for us that typically is along the Mississippi River, where if there's an origination on my side of the river, it's short haul for me to get it to an Eastern carrier. And a lot of times historically that's not looked terribly attractive. But when we're all thinking about our business the same way now and we're all eager to grow with our excellent service product, we're all starting to think about you know, just because it's a short-haul on my side, if it generates an attractive relationship with the customer, it gets more railroad penetration and there's opportunity on their side of the river to originate for us, we're making those trades. And we're not doing it historically like we might have where in order to make the move attractive for me, I'm going to move it out a route and put it to a gateway where it doesn't make sense. So I get a little length of haul. That's not happening anymore, right? We're all thinking very clearly about best overall route structure. What's the price it takes to win? Is that attractive in total? And if it is let's do it. And doing it collectively.

Yes. And I want to add on this one Lance. So to Lance's point, you're right. We're thinking about it as what would we do if we're one railroad. And that's product development components associated with that not just service. It could be something a little bit more than that. It could be something – a physical footprint that's there. Obviously, the equipment efficiency plays a part of it. But on an analog basis how do we go out and win that truck traffic that's out there that we haven't been able to capture.

Amen. A lot of opportunity there Cherilyn.

Thank you.

Our next question is from the line of David Vernon with Bernstein. Please proceed with your question. Mr. Vernon, your line is open for question.

Sorry, I was on mute there. So, Lance I wanted to come back to the question on domestic intermodal. We continue to hear from shippers as well as some of the supply chain partners that the ease of accessing the network, the service on the network is what it is and you guys have reported good metrics there. But as you think about the friction costs of getting in and out of the terminals on the intermodal, that is kind of holding back growth to a degree. And I'm just wondering, what can you as Union Pacific do over the next couple of years to solve that problem? You mentioned earlier that going retail or developing more retail capabilities isn't part of the solution. But I'm just wondering, how do we get out of the situation where when demand picks up, you end up in a situation where you got to throw up surcharges to keep traffic out of the yards?

Yes. Great question, David. And I want to also be clear, I didn't say that at some point in the future retail isn't the answer. I just wanted to make sure nobody thought I was announcing a new product on our call. So technology plays a really big role in what you were just talking about. What you're talking about David is fundamentally ease of doing business and removing blockages that keep customers from using the rail intermodal product. And to your point, Kenny has mentioned this before ITR. One of those can be, if you schedule a truck, when you bid for a truck you can get it scheduled at the time you want it, where you want it and be very confident that it's going to show up for you to load or to empty. We're reflecting the same kind of thing through ITR. ITR is basically a reservation system that allows domestic intermodal customers to know hey, I want to move this container from here to there and A., do you have availability on the day I want it? If the answer is yes, I'm booked and I know I got it. If the answer is no, I know when I can get it. And if it doesn't match my needs, it doesn't match my needs. But at least I have clarity and I don't make an assumption and then get angry when it doesn't happen. So that's one small example. We're also making it much easier for dray drivers, when they come on to the ramp with UPGo to be able to get through the gate quickly, know exactly where to park, where to drop-off and where to pick up and go. So they're getting a lot of help that way. We're helping the BCOs also by making sure we're tracking down chassis and keeping them productive in our terminal areas, right? Sometimes chassis get off property and they get lost or used for very different purposes that aren't bringing business to and from the railroad. So, there's just hundreds of different activity items in there that ultimately lead to a better customer experience. That's what I mean by that end-to-end experience. Kenny, you got anything else for that?

No. I mean, the fact that we're sitting down with our customers, talking about these chassis, talking about the container dwell, giving them really good data points, managing with data. So yeah, that's good.

And is there anything in the terminal side itself from an automation standpoint, or better throughput capacity that would also need to be addressed? Because this seems like every time the truck market gets tight we end up in the same kind of pig in the python, kind of problem.

That's a great question, right? And part of that is, yes. We can continue to be better and better, as we're rebuilding G4. We're introducing wide span gantry cranes there. That will be part of being able to get a box on and off, a well quickly. But part of that also though is making sure we have visibility deeper into the supply chain. Right now if stuff shows up with very little advanced notice, it's hard to realign our rail resources to handle it. To the extent we can get a week or even two, we can realign our resources pretty quickly. That gets back to ITR. ITR is most effective, when a maximum number of customers are using it. And they're using it as far out as they can. And we're working really hard with our customer base to get that to be kind of normalized behavior.

All right. Thanks a lot for the time guys.

Yes.

Thank you.

You next question comes from the line of Bascome Majors with Susquehanna. Please proceed with your question.

Yes Jim, congrats on the time you spend here. And good luck with whatever is next. Just wanted to focus on -- in the eight or nine months you've got left here, what are the one or two things you absolutely feel like you must wrap-up? And what are the larger projects that are going to take another couple of years or so, under Eric's leadership that are really kind of focused for that transition?

Okay. Short-term, listen, we've had a lot of discussion about our intermodal service products. We see that as a growth area. So I'm going to concentrate on making sure the end-to-end view. Ports, domestic terminals, we make them as efficient as possible. We make the interaction with the customer as clear as possible, so that we can react better. I think we did a pretty good job of reacting to the big -- the bump up in business. But I think we can be better. Want to concentrate on the relationship with the other railroads. And how we interchange and how we move traffic back and forth, to make it even cleaner than we are today, because I think we can both win. That was a great question on, how we're reacting with the other customers. And listen, other than locomotives, asset utilization service, productivity, that's what I'm going to concentrate on in the next -- and I'll let Eric run it. And we'll make sure that we're attuned lined up together and finish that off. So that's what I'm going to do in the next six to eight months.

Thank you. I appreciate it.

Next question comes from the line of Jairam Nathan with Daiwa. Please proceed with your question.

Hi. Thanks for squeezing me in. I just had a question on CapEx. How should we think about it for next year given I think you're not going to be acquiring any locomotives. But are there any projects planned for next year, which would kind of puts and takes on the CapEx side? And also if you could -- I know you mentioned the package business is a very good business. Can you just kind of go through some of the economics of that business here?

I'll take CapEx. Jennifer, from a project perspective, there's nothing big that's unusual on the horizon. We're sticking with our guidance Jennifer?

Yeah. I mean, the less than 15% of revenue is where we would plan to be again for next year. And obviously, we'll talk more about that in January. I know we still have some siding projects that we plan to finish out some that, will finish out yet this year and a little bit more of that work. But we continue to have a robust plan. We'll modernize locomotives. We'll continue to make sure the infrastructure is in good shape. So I feel good about our ability to spend that capital to keep the railroad safe, efficient and add the capacity as needed for customers.

Well. And one thing that we haven't talked about on this call is our new CIO, coming over starting at the beginning of November. And technology we've talked about throughout the call is an important element of our overall service product and ability to grow and win business and I'm sure he's going to have a help and we'll also have some capital elements, but I don't think it will be an unusually high spend.

No. Kenny do you want to...?

I don't have anything else.

I thought he asked...

He asked about parcel. How is the parcel biz and...

Yes. I mean parcel has been strong. We've gone out there -- the market has grown, but like I mentioned we've gone out there and had some pretty strong wins across the board on our parcel business. Expanding beyond parcel because parcel business is a pretty what I'll call service-sensitive business. I've been very proud of the team our loop teams our carry [indiscernible] team. We've been able to win some service-sensitive business with two large OEMs. All of this is truck traffic. One of them is a new entrant to rail so -- and the product is both short haul and long haul. So if you look at e-commerce and look at the service-sensitive markets the team and -- behind that service product has done a great job of growing it.

Okay. Thank you.

Thank you. Our final question of the day comes from Allison Poliniak with Wells Fargo. Please proceed with your question.

Hi guys, good morning. So I just wanted to make sure I understand the comments around new business opportunities and wins. Are you starting to see those accelerate and broaden here with the improved network and some of the efficiencies that you pulled through? And certainly understanding it's been an unusual year. Are those opportunities where you thought they would be at this point in your journey? Any thoughts there?

Yes. So the two changes there is a strong reliable service product that we haven't had in some time. The other thing is a lower cost structure would also make piece of the business more attractive that we haven't seen. I made some comments around opening up new markets and gave some examples of long-haul business just a few minutes ago. But we're also seeing the same thing with some short-haul business -- short-haul carload business where again if we can add large pieces to existing train service or even small volume pieces to existing train service, it drops to the bottom line. But those two things alone have really enabled our sales team and our marketing team to be very pointed and deliberate in having conversations with our customers about truck conversions.

Great. And just -- are those opportunities kind of now at this point in your journey are you kind of thinking are they where they should be at this point? Are they a little better? Any thoughts there?

We have. We certainly have room to grow. There's opportunity for us to grow. And we're excited and bullish on where we expect to be. But there's no part of this where we're ready to say that we've arrived or we're done. We've got a lot of room to grow here.

Yes. Allison we think more, sooner better. That's what Kenny hears all the time.

Great. Thank you guys.

We've reached the end of our question-and-answer session. And I would now like to turn the floor back over to Mr. Lance Fritz for closing comments.

Thank you again Rob and thanks everyone for the questions. It was a really good session today. I want to thank Jim again. I'm so pleased we've got him for as long as we do. We're going to put him to good use over the next eight months. And we look forward to talking with all of you again in January to discuss our fourth quarter and full year 2020 results. Until then I wish you all good health. Please take care of yourself and take care. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.